MSG Stock Is a Winning Bet Even If the Knicks and Rangers Aren’t

The MSG Sphere London Rendering
Courtesy of Madison Square Garden Company

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The spinoff of Madison Square Garden’s valuable sports teams into a separate public company expected in the first half of this year could help lift the shares of the owner of New York Knicks and Rangers.

MSG
(ticker MSG), whose stock fetches around $273, trades below the value that several analysts attribute to its assets, which are dominated by the Knicks and Rangers, the most valuable teams in the NBA and NHL, respectively, according to the latest Forbes magazine ranking. Forbes valued the Knicks at $3.6 billion and the Rangers at $1.6 billion.

MSG also owns the Madison Square Garden arena in Manhattan, air rights associated with the Garden and a group of other assets, including the Forum near Los Angeles. The company is valued at $6.4 billion and has about $1 billion of net cash on its balance sheet.

MSGBUYStock Picked Jan. 23, 2019

Price change

Andrew BaryBarron's Associate Editor
Shares of the owner of Madison Square Garden, the New York Knicks, and the New York Rangers should rise as the value of sports franchises grows and via the opening of two new venues in Las Vegas and London.

Evercore ISI analyst David Joyce last month reiterated an Outperform rating on the stock and a $360 price target, writing that the company has “unique, trophy entertainment and hospitality assets that accrete tax-efficiently, with an upcoming catalyst that is no longer apparently recognized in the shares.”

Joyce was referring to the separation of the sports teams from the entertainment assets that MSG plans to execute in the first half of this year. MSG stock popped in late June on news that the company was exploring such a move, rising to a 52-week high of $330 from under $270. But the shares have since given up almost all those gains. He argued that MSG assets are “largely sheltered from macroeconomic headline risk, advertising cyclicality, and cord-cutting risk endemic to much of the rest of our coverage universe.”

A spinoff of the sports teams could facilitate a sale of the teams by the controlling Dolan family. The Knicks in particular likely have huge trophy value with speculation that the team could fetch $5 billion, despite a history of poor on-court performance. The team is 10-35 this season, the second worst record in the NBA and it hasn’t made the playoffs since the 2012-2013 season. Despite that, the Knicks have ranked in the top three among NBA teams in ticket sales revenues during the past season and the team’s estimated value continues to rise.

Chairman James Dolan briefly stoked hopes of a sale when he told ESPN in a December interview that he had an obligation to shareholders and that “I could never say that I wouldn’t consider selling the Knicks.” The company then sought to tamp down the speculation by stating that the company has “no plans to sell the Knicks.”

The Dolan family has its critics, but it has treated investors well, selling
Cablevision Systems,
the cable TV business, to France’s Altice in 2016. Altice ultimately took it public as
Altice USA
(ATUS). The Dolans also spun off
AMC Networks
(AMCX) from Cablevision, and spun off MSG Networks, a regional sports network, (MSGN) from MSG in 2015. These moves have created considerable value for shareholders.

Some of the weakness in MSG stock reflects uncertainty surrounding the company’s plans to build a state-of-the-art concert arena called MSG Sphere in Las Vegas, expected to be completed in 2021, and a similar arena in London, due to open in 2022.

The new Vegas arena will seat 18,000, have an LED exterior, and the “largest and highest resolution LED screen on Earth” inside, as well an acoustics system designed to deliver “crystal-clear audio” to every seat in the house, according to the company. MSG, however, hasn’t disclosed any financials on the Sphere projects, including projected costs and return objectives. Joyce is assuming a cost of $650 million each, and other estimates are higher. The company may say more about the spinoff and the Sphere in conjunction with its quarterly earnings release on Feb. 1.

Boyar Intrinsic Value Research included MSG on its annual recommended list called the Forgotten Forty in December and noted that the company has a “strong venue renovation track record,” citing the $1 billion overhaul of the Garden in New York.

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Another bullish development for MSG, Boyar noted, was additional purchases of stock by Silver Lake Group, the technology and private-equity investor, in the fourth quarter in the $260 to $300 range. Silver Lake now holds an 8% stake in the company. The Dolan family has a roughly 21% economic interest and 71% voting control through supervoting stock. Boyar also cited a newly issued $40 million grant of restricted stock and options to James Dolan in October with the options struck at above-market prices ranging from $308 to nearly $386 per share.

Boyar’s view is that with Dolan “ostensibly focused” on the MSG Sphere, “we see the sale of the teams as a distinct possibility.” Boyar’s view is that the Knicks and Rangers “would command a significant premium” to the Forbes estimate.

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